Market Finance focuses on companies that provide financial services to clients similar to traditional commercial banks.
The Financial Stability Board (FSB) has calculated that the assets held globally by non-bank financial institutions now represent one-quarter of the world’s total financial assets, and approximately half the size of the regulated banking system. The sector’s growth has been strongest in emerging markets. Examples of important components of the non-bank, non-insurance system include securitization vehicles, asset-backed commercial paper conduits, money market mutual funds, markets for repurchase agreements and mortgage companies.
Consequently, regulators have begun to focus on the non-banking sector, in particular as a source of potential systemic risk.
Properly structured, and with risks properly managed, non-bank financial intermediation activities can provide significant benefits to investors, borrowers, and the wider economy. As one example, it is vital to have an effective, liquid and transparent securitization market, and it is important that the regulatory system supports this.
It is concurrently important that systemic risk be managed: that the activities of these organizations are not unnecessarily stifled, but that new sources of systemic risk do not emerge outside of the regulatory perimeter.
There is also the potential for regulatory anomalies, if regulation is strictly based on entities such that the same activities fall under different regulatory frameworks, from which undesired potential arbitrages could emerge.
The IIF welcomes the work of the FSB and national authorities on greater international co-ordination and consistency of policy across jurisdictions.
The aim of market finance regulation should be a comprehensive and targeted approach that mitigates systemic risk and avoids regulatory arbitrage while preserving the benefits of non-bank financial services.
The focus of policymakers should be on activities not entities, operating on the premise that the same activity should receive the same regulatory treatment, regardless of the entity undertaking the activity.
IIF has been active in opposing mandatory minimum haircut requirements and will help lead the effort to engage the FSB as it considers extending its work beyond Money Market Funds to all credit funds.
The FSB continues to develop its approach to non-bank, non-insurance organizations, although most focus to date has been on specific activities such as money market funds repo/securities lending.
The Basel Committee and national banking regulators also continue to review Bank Prudential Regulation for securitization activities, in terms of both capital and liquidity. The Basel Committee & IOSCO’s Task Force on Securitization Markets also undertook a survey in July 2014, including an examination of the role of non-bank investors.